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Blue and white vs red, white and blue investing

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Baruch Labinsky
Baruch Labinsky, author of 'A Financial Guide to Aliyah and Life in Israel', is the founder of Labinsky Financial, a
… [More]financial planning firm located in Ramat Beit Shemesh. Licensed by the Israel Securities Authority as a portfolio manager, Baruch specializes in working with olim, who are successfully transitioning their finances to Israel. Baruch’s book 'A Financial Guide to Aliyah and Life in Israel' is available in bookstores, at Amazon and through labinsky.com. Baruch lectures regularly for Aliyah organizations in Israel and around the world on various financial topics. Contact Baruch at Baruch@labinsky.com. [Less]

The media and many financial pundits in Israel have in recent years stressed the following equation:

Fact 1: the US is cracking down on offshore accounts and trying to locate hidden money to expand its tax base and cover its tremendous deficit.

Fact 2: legislation, including the Foreign Tax Compliance Act (FATCA) and longstanding Foreign Bank Account Report (FBAR), has complicated the reporting requirements for non-American financial institutions and for individual Americans around the world.

Fact 3 – the IRS has increased the number of audits performed on Americans living in Israel.

Conclusion – close your overseas accounts and move your money back to the USA where everything is safe and secure, or risk wading into bureaucratic quicksand.

Most articles in the media (print, screen and aural) accept this truth and have concluded that all Americans need to close all their worldwide accounts and go back to safe, regulated markets in the US, opening up or extending the use of investment accounts in the US.

While everyone is allowed their professional (or even non-professional) opinion, I believe the average US citizen and expatriate need to go a little deeper in understanding the equation and its proponents.

Everyone has an agenda which colors their perspective. I’ll tell you outright that as an Israeli investment portfolio manager/financial planner living and working in Israel, I believe very strongly that in order to meet long-term financial requirements and to reduce long-term risk, expatriates who are resident in Israel need to work within the Israeli financial system. Not only does investing locally stimulate our economy and benefit ourselves in the process, but I genuinely believe that Israel offers excellent investment opportunities that need to be considered by all Israelis (and not just the multinationals who invest billions in our economy). Investing part of your money in the local currency also reduces your long-term currency risk and matches future expenses with future revenues to reduce long-term financial risk.

Please don’t misunderstand. That doesn’t mean everyone needs to invest everything they own locally. Far from it! That would ignore the many types of diversification that are needed when investing. But rejecting the local market can also be very risky and ignores the simple fact that as we age, there is comfort and simplicity in having our money close by. Being able to walk into our local bank branch, or meet with a local financial professional in order to manage our finances is increasingly important as the international financial markets and regulatory environment get more complicated.

There are several important issues to consider. A major question has to be, why do some investment advisors, lawyers and accountants encourage Americans to invest solely in the US and imply it’s illegal to invest elsewhere? While investing in mutual funds outside of the US can be problematic (i.e., PFIC issues for the financially astute) to suggest that all investing (including stocks and bonds) is illegal – notwithstanding the current Israeli banking position to close or not open new investment accounts for Americans – is dishonest. Yes, PFICs are problematic, but there are many other ways to invest. And to suggest, as some do, that investing in Israel is a cumbersome process, and that Israeli institutions don’t provide the correct documentation for the average investor to file easily in the US, is just scaremongering. Investments other than non-US registered mutual funds are completely legal and do not create bigger headaches than those for which the new laws were created.

Where does your local professional earn the majority of his/her money? Is there any way that this is impacting their advice? They may well have a variety of reasons – but don’t ever forget that a main reason could well be due to revenue generating considerations.

Obviously the caveat is that the investor must be aware of the tax implications of his actions. The US has very structured tax laws for both resident and non-resident Americans. And America is clamping down on those who have invested abroad and did not properly disclose their holdings. You must consult with tax professionals to ensure that you are filing properly – it goes without saying that that is crucial. But once you have ascertained that you are acting correctly there are many other considerations regarding where to keep your money.

I doubt I’m shocking you when I say that Utopia doesn’t exist – not in Israel, but certainly not in America either. Each country has its issues and problems. Americans have to deal with a government that is devaluing its currency, pushing down interest rates to zero thus punishing savers and specifically retirees. It’s also a well-known fact that the American financial regulatory environment is incredibly problematic (to say the least). How many other countries have hundreds of banks going bankrupt a year? Yes, the government covers a large part of those losses with FDIC insurance, but one needs to ask why the US needs this insurance in the first place. That’s not even mentioning the upcoming fiscal cliff, increasing national debt and unfunded pension and medical liabilities among other issues. A recent article from the Wall Street Journal http://blogs.wsj.com/deals/2012/08/16/top-50-safest-global-banks/ indicated that the USA has only 1 out of the 50 safest banks in the world according to the Global Finance Magazine’s ranking of the world’s safest banks. Their implication is to avoid the US banking system.

So stop and reassess. Look around and hear opposing opinions before you follow those espousing the virtues of investing in America. You might want to keep money in your former country because, due to your familiarity, it matches your comfort zone. But if Israel is your home now think twice about it. Israel is an amazing place with a thriving economy despite all the odds. Your life is here, why not your money?

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